Illinois’s New Class-Based Pension Math

by Ron Baiman | December 05, 2013

Having boxed themselves into a political dead-end by adopting the austerity agenda of the business community as represented by the Illinois “Civic Federation,” Democratic House Speaker Michael Madigan and Democratic Governor Pat Quinn on Tuesday, Dec. 3, rammed through a state pension cutting bill that would reportedly reduce the state’s $100 B unfunded pension liability by $160 B (see here). The Democratic President of the Senate, John Cullerton (a supporter of a Senate bill negotiated with the unions, that would have cut less and given workers a choice of options), voted for the House bill, but warned that it had “serious constitutional problems” and was reportedly silent during the debate, not present when the final deal was announced and a no-show an earlier meeting attended by the three other legislative leaders (see here).

CPEG and others have repeatedly pointed out that Illinois’ has a revenue, not a pension problem (the average Illinois state pension in 2011 was $ 27,000 comparable for a wealthy state to the $23,000 average among the states), and have offered numerous equitable and politically popular proposals to raise additional revenue including enacting a Financial Speculation Tax, and closing egregious business tax breaks (see power point link here and here).  It is laughable to hear of Speaker Madigan (a man of untold wealth who exemplifies Illinois’ utterly corrupted “pay for play” political “democracy,” see here) talk of the Illinois pension system being “too rich”.

But no, since “pensions” have been defined as the state’s premier political problem, with Democratic election prospects riding on achieving some kind of pre-election “solution,” the Legislature passed a farcical bill based on a legal fiction that the clear language of the state’s constitution that the state’s pension system is “an enforceable contractual relationship, the benefits of which shall not be diminished or impaired” – allows wiggle room for “consideration” under which the state will unilaterally renege on $ 160 B that it owes (an actuarial estimate of the present value of the pension liability savings summed over the next 33 years – see CPEG power point link op. cit.) in return for reducing the required employee pension contribution to the pension systems by roughly $ 24 B (a similar estimate of the present value of the 1% reduction in pension contribution out of state payroll over the next 33 years, based on CGFA future state payroll estimates and 5% real return on investment had these funds been invested in the pensions systems over the next 33 years – i.e. roughly an “apples to apples” comparison roughly using the assumptions behind the $ 160 B pension cuts estimate above – for CGFA data see Appendix G of this).

Some legal theory! I’ll give you $24 B and in return you give me $ 184 B (the difference being the estimated $ 160 B in reduced state pension liability) and we’ll call this unilateral $ 160 B theft from state workers a “consideration” that somehow satisfies the original contract. I’d like to see this kind of legal “argument” prevail when it comes to state borrowing from bond holders! We the state of Illinois will give you the bond holders $24 B, in return you the bond holders give us $ 184 B, and we’ll call it a deal! You don’t agree? Too bad. This is a new kind of “consideration contract” to which only one party has to agree.

To our class-based “political debate” and class-based “justice” (see here), we can now add class-based “math”!

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